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Is Melbourne in a property bubble?

Melbourne’s property market is positively booming with house prices surging consistently over the last 12 months, sparking concerns that a bubble is brewing.

Melbourne house prices shot up 19 per cent over the 12 months to the end of the March quarter to a median value of $482,000, according to RP Data. Other figures are more generous, with the Australian Bureau of Statistics reporting a 27.7 per cent surge and Australian Property Monitors reporting 27 per cent (compared to 14.7 per cent in Sydney and 16.2 per cent nationally). Whichever way you look at it, it’s a big jump.

So is Melbourne in a property bubble? And if so, when’s it going to burst?

Driving forces of the hot Melbourne market

“Part of that 27 per cent from last year was recovering the couple of per cent that it went down in the GFC but most of it is new growth,” says Matthew Bell, Economist at Australian Property Monitors.

He explains that economic fundamentals are fuelling this surge, such as strong population growth, strong income growth and undersupply of housing. While Victoria housing supply is not as dire as in other States, it’s still a factor. “It has pretty generous State government incentives for building, but they’re set to expire… and there’s nowhere around the country where we’re building enough properties.”

Bell says that it’s those less sensitive to interest rate rises and the removal of first home owner stimulus that are behind the wheel. “It still is that top end of the market to a large extent that is driving price growth, and given that end of the local economy both in Sydney and Melbourne – as in the finance industry, IT, the professionals – have all come back [from the GFC] quite strongly, that’s driven a lot of the growth.”

Angie Zigomanis, Senior Analyst at BIS Shrapnel, says that Melbourne has been the country’s engine room of job creation over the last 12 months, which has strengthened income growth and the local economy.

“There’s also been strong population growth, lower rental vacancy rates, and these things continue to push people out into the home ownership market,” he says.

Zigomanis says low interest rates have also been a factor. “They’re rising now, but 12 months ago they were at 40 year lows.”

Is Melbourne in for a ‘pop’?

“I think 27 per cent a year is not sustainable and it’s not particularly good for affordability, but I don’t think it’s going to lead to a city-wide fall in prices,” says Bell. “Certainly not of the order of 10 or 20 per cent that some people are talking about.”

Bell expects that prices will start to cool in the June quarter. “We’re definitely going to come down from that 6 and 7 per cent a quarter growth rate – I wouldn’t be surprised if that happens for a couple of quarters – and it depends on how quickly rates go up. But I think medium to long term, it’s very hard to see prices going down on an annual basis as long as the economy is going pretty well.”

Zigomanis feels that if prices continue to grow the way they have, Melbourne is likely to be in for a slight correction, but it will be more of a deflation than a pop. “You might see a small decline in prices of 3 or 4 per cent and then it would probably just flatten out after that.”

“A good example is a place like Perth, where prices peaked in 2006,” he says. “Arguably prices overshot the mark – and while interest rates were still rising as well. It impacted on affordability and the amount that people were willing to pay for properties and we saw a correction in prices. That’s potentially something we could see in Melbourne.”

How can we protect ourselves?

Both Bell and Zigomanis agree that protecting yourself from a property bubble comes down to smarter borrowing and not over-gearing.

Zigomanis says to factor in more rate rises when making borrowing decisions. “Our forecast is for the variable rate to pass 9 per cent in a couple of year’s time. They’ll go through a pause at the moment…as economic growth picks up they’ll slowly ratchet interest rates up again over the next couple of years.”

“Don’t convince yourself you can go over your budget or over your borrowing limit just because prices are rising and they always will,” says Bell. “Prices do fall and to think that they don’t is wrong. Stick to your budget and work out what you can pay, and banks will help you do that. You shouldn’t be putting into that calculation that if you have to sell you’ll make money, because it costs a lot of money to get in and out of the property market with stamp duty and taxes etc.”

About Diane Leonard

Diane is the digital marketing manager at Aussie Home Loans. She is a self-professed geek and lover of all things digital. She continues to search high and low for the healthier version of herself, and when she can fit it in, you'll find her preoccupied with her cat - Jez, buzzing around Sydney on her scooter or attempting to learn a new tune on her ukulele.

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